Last Friday we detailed a couple set ups in two mega-cap down stocks that report tomorrow before the open, General Electric (GE – Choose Your Own Adventure) and McDonalds (MCD – Making A Meal Out Of It), and we want to quick hit on some of the thoughts prior to today’s close.
First let’s look at GE. The main point that I wanted to get across was that options prices look unusually cheap, especially when you consider the volatility in Honeywell since their pre-announcement earlier in the month. Watch here on CNBC’s Options Action:
The main take-away is that if you think the stock is inclined to move, and you have a directional inclination, risking 1% to play the event by either replacing stock, adding protection or potentially adding leverage on a move looks fairly attractive.
But as stated in the video, and in the post:
with long premium directional trades into events, you need to get a lot of things right to just break-even, magnitude of the move, timing and most importantly direction
So with less than two hours to today’s market close, and a little more than a trading day to expiration for Oct 21st options (and an event in between) if you get direction wrong then your trade is likely to be a total loser.
The trade detailed was the purchase of Oct 29 calls with the stock at $28.95 for 30 cents.
Now with the stock at $29.05, these calls are 34 cents, or a little more than 1% of the stock price.
If the stock closes tomorrow down 6 cents from here, and you own these calls, you lose 34 cents. So as we said, the options are dollar and vol cheap, but thinking about them differently, if you own them right now, the margin for error is slim, you need to be convicted, and or they fit well against existing positioning (ie if you were long stock and did not want to add but willing to risk 1% to leverage the position in the event of a sharp post earnings rally).
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And now to MCD. My view was simple, the stock’s poor relative performance with what appears to be weakening fundamentals and a treacherous technical set up into tomorrow’s print means long term holders of the stock should consider short term protection with an eye towards minimal premium outlay. The stock has had a bad week. Again, from Options Action:
And the hedge idea from RiskReversal:
Against 100 shares of an existing long in MCD at $115, buy Dec 120-110-100 Put Spread Collar for 40 cents
- Sell 1 Dec 120 call at 90 cents
- Buy 1 Dec 110 put for 1.70
- Sell 1 Dec 100 put at 40 cents
With the stock at $110.65, this structure is doing what it is supposed to do. The only thing I might consider doing to this if I was long stock and long put spread collar is roll down the short call in Dec from 120 to 115 originally 90 cents, now offered at 25 cents and 115 calls 1.06 bid), and reduce the cost of the collar to a credit.